Running a successful business takes keeping a finger on the financial pulse of your company. You can only make informed decisions after you're aware of your business's financial standing. And the best way to stay up to date on your finances is to maintain current bookkeeping records.
If keeping detailed records makes you yawn, think of it this way — your books reflect how well your business is doing. They're a progress report. Staying on top of your accounting and keeping good records will keep you on course and lead to a more successful business. Knowing this will allow your business to reallocate, reprioritize, and pivot quickly.
Bookkeeping is the process of organizing and recording your business's financial transactions, giving you a bird's eye view of your business success. With thorough books, you can see at a glance where your company is earning revenue, where it's coming from, and where you're spending money. Up-to-date books also let you quickly and easily access financial figures for tax deduction purposes.
You don't need a master's in accounting — even a basic understanding of bookkeeping can help improve your business.
In addition to illustrating how well (or not so well) your business is doing, understanding your company finances makes you a more informed business owner. Even if you plan to have someone else handle the books, such as a partner, professional bookkeeper, or online bookkeeping service, it pays to understand the basics so there aren't any unwelcome surprises.
Here are some of the top reasons why accurate bookkeeping is essential to any business.
Finding financial errors months after they occur makes it difficult to figure out what actually happened. It can also become impossible to get refunds from merchants or your bank when too much time has passed.
Simply looking at your bank balance isn't enough to give you a clear idea of what's really going on with your business. Accurate bookkeeping records point to whether sales are up or down.
Thorough books also highlight where you are spending too much money. For example, you may find that utility costs have risen lately. This gives you an opportunity to do some research to find out why and make necessary changes.
Lenders generally require current financial statements to consider your company for business loans and credit. They'll ask for balance sheets, profit and loss statements, and cash flow statements. Seeing the state of your finances helps lenders determine if your company will be capable of paying back debt. The only way to create such statements for lenders and creditors is with raw data found in well-kept books.
When your books are up to date, your accountant can more easily pinpoint all the deductions you're entitled to. Without supporting documentation, your CPA can't make legitimate claims on your tax return. This can mean paying higher taxes than necessary.
If you ever find yourself in a dispute with a customer, supplier, or government agency, accurate financial records can help prove you aren't at fault and that you've done everything necessary financially. When your financial records are in order, you are also much more likely to spot fraud by employees, customers, or vendors.
Efficient, accurate bookkeeping ensures that you don't waste any time or energy searching for financial information. You can easily and quickly track down every dollar coming in and going out.
As a small business owner, you have several options at your disposal for Swyft Books. The following methods vary as to their cost-effectiveness. As your business grows, you may require more costly solutions.
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Performing your own bookkeeping can save you a little money. Do-it-yourself Swyft Books and accounting software can help you keep your accounting in order by tracking bank transactions, updating account balances, and generating financial statements.
Keep in mind that you need to input all the necessary data to create the reports and statements. That requires that you understand how the software works and what information you need to enter.
An in-house bookkeeper at your company will lighten your load by overseeing all financial transactions for you, including payroll. The person will also keep you informed of the financial state of your business and make recommendations about how to save money.
As a skilled professional, a full-time, in-house bookkeeper will require a competitive salary, and that can be costly. If your business isn't large enough to sustain a full-timer, consider hiring a part-time bookkeeper. Increase the person's hours as needed during tax season and other busier times. Or make it a full-time position and have the person perform additional administrative tasks within the company.
There are professional financial agencies with teams of bookkeepers and accountants on staff. If you sign up with such an agency, they'll assign a bookkeeper or accountant to oversee your account. The professional assigned to your case will input financial data and prepare and provide reports, including tax documents for your tax preparer. However, while thorough, this option can be on the expensive side.
Online bookkeeping services like Swyft Books offer the opportunity to work with professional bookkeepers via a secure network. With these services, a bookkeeper will download your information through online banking and your merchant processor so you don't have to provide financial records or receipts.
Many virtual bookkeeping services provide a year-end financial package containing all the information you need for your accountant to file your small business tax return. This is one of the more cost-effective options.
While an accounting degree would certainly help if you had one, it isn't a prerequisite for doing your own small business bookkeeping. Here are the steps to DIY bookkeeping for your company.
This step involves devising your chart of accounts (see glossary for definition). By creating appropriate categories, you assign locations for recording all your company's various financial transactions.
While you won't necessarily have the exact same accounts as another company, there are many categories commonly found in bookkeeping systems. Each category will also be labeled with an account type. These include five types of accounts — asset, liability, equity, expense, and revenue. Here are examples of each of these types of accounts.
Assets are those items that provide your company with a future economic benefit. Here are some examples:
Expenses refer to the money required for day-to-day operation. Examples include:
The revenue category includes accounts related to income earned from the sale of your products and services, as well as interest from investments. Here are some examples:
As the name suggests, liabilities are bills and loans and such that the company is required to pay. These include:
An equity account includes net assets, or the value of a company's nonoperational assets, after liabilities are paid. Examples are:
The first step in setting up your company's bookkeeping is deciding between single-entry or double-entry bookkeeping. With single-entry, you enter each transaction only once. When using double-entry, you enter each transaction twice — once as a credit and again as a debit. With the double-entry system, your books should always be balanced.
Most businesses use double-entry. Single-entry is generally best for very small businesses where there is very little, if no, inventory. If you plan on growing your company, it's best to start with double-entry. Most accounting and bookkeeping software and accounting services operate on a double-entry system.
With a double-entry system, you record twice in the general ledger. Once under the debit (Dr) column and once under the credit (Cr) column. Usually, you record the debit on the left-hand side of the ledger and credit on the right.
It's important to understand that debit doesn't necessarily mean that money is being spent and credit is not necessarily money being earned.
The type of account defines the transaction as a debit or credit. A debit increases an asset or expense account or decreases a liability or equity account. A credit increases a liability or equity account or decreases an asset or expense account.
Let's say you make pottery and sell it to the owner of a shop. The shop owner buys $500 worth of pottery with cash. You deposit the money into your business bank account. To record this transaction, you mark the $500 cash as a debit under assets and then enter the $500 under revenue as a credit.
In another example, let's say that you decide to spend $2,500 for a new kiln that is bigger and will allow you to make more pottery. You take out a loan to pay for it. You would then enter the $2,500 as a debit in the loans payable account under liabilities. And you would credit your cash account under assets with the $2,500.
Businesses use either a cash or accrual accounting method. If you use cash accounting, the only time you record transactions is when money exchanges hands. That means that if you bill a customer today for services rendered, you won't enter anything in your ledger until the customer pays you.
While cash accounting is simple and straightforward, it only gives you a snapshot of your company's financial health at present. You won't be able to access how your company has done overall or historically. That makes the cash method fairly limiting.
If you're using the accrual method, you record the income when you bill the customer instead of waiting for payment. At the end of the year, you have recorded all income you earned that year, even if you haven't collected it yet. The same applies to deductions, which you record when you're billed for expenses.
While the accrual method is more complicated, it gives you a better overall view of your company's financial health over the long term. You can see how much money was earned and spent during a given time period. You must use the accrual method if your company makes more than $25 million annually. Some banks also require accrual accounting, and you will need to use this method if you have inventory.
Once you've set up your books, it's essential to keep on top of entering transactions and stay up to date with your finances. Entering transactions regularly also helps ensure accuracy. Each debit and credit must be recorded in the correct account. If you don't do this, your books won't balance, and you'll end up with inaccurate, incomplete raw data for reports.
To record transactions, determine the accounts where you will enter the transaction under debit and credit.
Let's say you purchased a new laminating machine for $1,200 cash. You'll enter the laminating machine transaction in two accounts — cash (as an asset) and equipment (also an asset). Because you are decreasing your cash account and increasing equipment, you would record the $1,200 as a debit (on the left) under the equipment account and a $1,200 credit for the cash account (on the right).
Once you've entered all the data, it's time to balance your books. This means adding up your debits and credits. The totals should match. If they do, you have balanced your books.
If they don't match, you need to recheck your work. It's possible that you added a transaction to the wrong category. Maybe you put a figure in the debit column instead of the credit column. Or you may have entered an amount incorrectly.
The longer it's been since you've balanced your books, the more time-consuming it can be to find an error. That's why it's a good idea to balance your books regularly.
When you finish balancing, you can generate reports. Reports such as your balance sheet, profit and loss (P&L) statement, and cash flow statement can give you vital information about the state of your business. Bookkeeping software enables you to quickly and easily generate these reports by entering the raw data.
Ensure that your financial records are safely stored and that you have backups. If you have your financial records on a standalone computer, make sure that you have a backup stored in another location. Cloud-based systems are an excellent choice for keeping backup records.
Accurate bookkeeping is vital to your business's long-term success because thorough records give you an accurate picture of how you're really doing. Business may be humming, but numbers don't lie. Understanding the state of your finances gives you the heads up when trouble is brewing and a high-five when things are moving along as planned.
The best bookkeeping tools for your business make you feel confident about your company and its long-term profitability and resulting success.
It's helpful to understand common bookkeeping terms. Here is a definition of some of the most often used concepts.
Accounts Payable (AP) is the amount of money your company owes creditors and suppliers. It is generally short-term debt that you pay off within weeks or a month. Accounts payable can also refer to the department in a company that pays the business's bills. The cash flow statement will contain increases and decreases in total AP from the prior period.
Accounts Receivable (AR) is the amount of money due your company for goods or services that you've provided on credit to recipients. AR is listed on your balance sheets as an asset and is generally due in the short term.
Assets are your cash on hand and other monetary resources, either tangible or intangible. These include inventory, accounts receivable, and property, such as buildings and vehicles.
A balance sheet is a document that contains the totals for your company's assets, liabilities, and equity. It is a snapshot of these items at a particular time and reveals the current financial health of your business. You should consult this report if you are thinking about expanding your company. For the balance sheet to balance, your total debits need to equal your total credits.
A cash flow statement is similar to a Profit and Loss Statement, but it only applies to cash and doesn't include non-cash items such as depreciation. Cash flow statements help show where you're earning and spending money and the business's current ability to pay its bills.
A chart of accounts outlines how you categorize your revenue and expenses. It ensures your transactions are effectively organized so you or your bookkeeper can easily produce financial statements, such as profit-and-loss statements. Your tax preparer may ask to see your chart of accounts when preparing your tax returns.
Categories in the chart of accounts are formed by giving a number to items, such as your checking and savings accounts. The chart will also indicate if the category is a debit or credit. The chart of accounts is included in the company's general ledger.
Cost of Goods Sold (COGS) is the money you invest in creating your product or administering services to your customers. It is the expense required for making sales. This will be one of your most significant expenses and is included on your Profit and Loss Statement. When you subtract the cost of goods sold from your net sales, you get your gross profit.
Double-entry bookkeeping allows for keeping track of where your money is coming from and where it is going. This requires entering every transaction twice — in the debits account and in the credits account.
Equity is what's left over after liabilities are subtracted from assets. The equity is the owner's interest in the business, including stock and retained earnings.
Your expenses are what you pay for items and services required to run your business. These will include operating expenses such as utilities and payroll.
The general ledger is the record-keeping system for a business's financial data. This document contains a record of all financial transactions for the company. It is from information in the general ledger that various reports are created, such as the income statement.
Also known as gross income, gross profit refers to the amount calculated by subtracting the cost of goods sold by your company from its revenue. This figure is an indication of how well your company uses labor and supplies to produce goods and services.
Classified as an asset on your balance sheet, inventory refers to goods the company owns that are available for sale, as well as raw materials that will be used to produce goods for sale. Inventory turnover is representative of the company's ability to generate revenue.
Debts owed, including loans, credit, and accounts payable.
Net sales is the sum of your business's gross sales minus its returns, discounts, and allowances.
Payroll is the amount of money you pay on a regular basis to employees for their services. These figures include the person's salary, as well as taxes paid by both employer and employee. Also included are any retirement or health insurance contributions made by both parties. Having up-to-date payroll records is vital, as you need to report all this information to the government during tax season.
Also known as an income statement, this report reveals revenue, costs, and expenses over a period of time, such as a quarter or year. The P&L is used to gauge the health of your business and lets you make forecasts about sales and profits.
Money your business earns, usually through sales and services.